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U.S. Steel Shows Encouraging Signs Of A Recovery

U.S. Steel (
X
) announced its fourth quarter results for 2012 Tuesday. While the
company reported a net loss for the quarter and the whole year, the
operating results across all major business segments were positive
for a third quarter in succession. Going by the guidance provided
by the company as well as market conditions, we expect the first
quarter of 2013 to be moderately positive.

U.S. Steel reported a quarterly loss of $50 million as compared
to the previous year's loss of $211 million for the same quarter.
Its overall loss for 2012 stood at $124 million, which is greater
than the loss of $53 million incurred in 2011. Steel shipments and
sales declined from last year, primarily due to the sale of U.S.
Steel's Serbia operations in the European business segment.

For the full year, the average realized price for steel fell
drastically from $845/tonne to $742/tonne for the company's
European business due to challenging market conditions. Prices
showed a negligible decline for the flat-rolled Steel segment from
$759/tonne to $750/tonne and an appreciable rise for the tubular
steel segment from $1612/tonne to $1687/tonne. While higher prices
in the tubular steel segment were driven by increased drilling
activity in the U.S., the Flat-rolled steel division was affected
by cautious buying patterns among consumers in light of an
uncertain economic outlook and the U.S. fiscal situation.

In the next quarter, the erformance of the flat-rolled segment
is expected to be flat. While shipments in the tubular steel
segment are expected to increase only slightly due to existing
inventory levels, the European business is expected to perform
well. Higher iron ore costs due to rising prices will impact the
cost structure of the European business.

U.S. Steel has three main business segments- Flat-rolled Steel,
U.S. Steel Europe, and Tubular Steel. Flat-rolled steel accounts
for nearly 75% of shipments while U.S. Steel Europe and Tubular
steel account for 15% and 10% of the shipments respectively. The
company's total shipments of steel in 2012 stood at 21.7 million
tonnes.

U.S. Steel has managed to achieve self-sufficiency in terms of
its requirement for coke. Firstly, the company is now producing
enough coke from its own facilities at Clairton and Gary Works.
Secondly, it has taken advantage of cheap and plentiful natural gas
available due to the shale gas abundance by coming up with methods
to cost-optimize the blend of coke and natural gas used in its
operations. For Q1 2013, the EIA has forecast a nearly 6.5% higher
Henry Hub natural gas price as compared to the previous quarter and
steel scrap prices are expected to be higher as well. Therefore,
the cost advantage from expected lower coal prices will be offset
to some extent, even though overall raw material costs are likely
to be lower than the previous quarter for the Flat-rolled steel
segment.

The Flat-rolled steel segment may stand to gain from the
automotive sector as U.S. Steel expects vehicle production to show
an 18% annual growth in 2013. According to a company
presentation given in November, U.S. Steel has formed a joint
venture with Kobe Steel to produce light, ultra-high strength steel
to be used in automobile manufacturing. This grade of steel is
designed to meet the fuel efficiency requirements for automobiles
in the years ahead. Production is expected to begin in Q1 2013 and
we expect robust demand in future quarters.

Demand from the construction industry and the pipe and tube
industry is also expected to be strong in the U.S. While the
company has raised steel prices for the next quarter, the impact on
sales and profits will be subdued due to lower prices in the
market-based contracts segment. Prices for market-based contracts
lag spot prices and since the former account for 70% of the
flat-rolled steel shipments, overall price realization is expected
to be comparable to the fourth quarter of 2012.

Moderate demand growth is expected from the appliance,
electrical steel and tin plate industries in Europe. For the
tubular steel business, an expected increase in rig count is good
news, but the increasing quantum of imports continue to pose a
challenge to U.S. Steel. In 2012, imports constituted more than 50%
of the total market share in the oil country tubular goods and
line pipe market segments. For the same reason, positive impact
from increased drilling in the Gulf of Mexico may be moderate.

The U.S. Steel management acknowledged receiving expressions of
interests from potential buyers for its Slovakian plant, but
declined to provide any further details. This facility
produces 5 million tonnes of steel. If the sale of the
Slovakian business goes through, it will end U.S. Steel's presence
in Europe. It has already sold its loss-making Serbian operations
in January 2012. We think that a major factor driving a
potential U.S. Steel decision to sell the Slovakian business could
be the financial liabilities it may incur on account of new
environmental regulations which are to be enforced shortly.

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